Japanese widen lead in profits
TRAVERSE CITY -- As Detroit's auto executives negotiate new contracts
with the United Auto Workers, they brandish an alarming statistic: the
difference between what they and their leading Japanese rivals earn in
the United States.
According to a study released Tuesday, the difference widened to $3,814
per vehicle in 2006, a 32 percent rise over 2005 levels.
That gap helps explain the huge discrepancy between the financial
performance of Japan's top three carmakers, which earned more than $10
billion in the United States last year, and U.S. automakers, which lost
money in their home market.
But Detroit executives may be not be able to eliminate the competitive
disadvantage just with changes to their union contracts. Labor costs
account for $1,200 to $1,500, or less than half of the difference, said
Laurie Harbour-Felax, managing director of the consulting firm Stout
Risius Ross and the author of the study.
"Labor cost is a significant portion of the gap, but other factors have
a greater ability to affect profitability," she said.
The biggest problem, she says, is that U.S. automakers still produce too
many versions of mirrors, door handles, gear shifters and other components.
"They're not communizing platforms around the globe and individual
components around the globe," she said. By contrast, the Japanese use
more common parts across their vehicle ranges.
By designing fewer versions of each component, U.S. automakers would
improve their own performance while helping their suppliers by allowing
them to generate greater economies of scale.
Part of the year-over-year increase in the profitability gap reflects
onetime restructuring and employee buyout costs at General Motors Corp.,
Ford Motor Co. and Chrysler, Harbour-Felax said. All three automakers
are closing plants, eliminating jobs and scaling back their North
American operations in line with their declining U.S. vehicle sales.
Their combined share fell below 50 percent in July for the first time.
That trend suggests that Detroit's automakers still lag foreign rivals
when it comes to designing vehicles that consumers want to buy, the
study said. That inevitably erodes the domestics' profitability because
slow-selling vehicles tend to be discounted.
Similar studies have yielded different figures, but still show a marked
disadvantage in the cost structures of U.S. automakers.
According to Harbour-Felax's study, the weakness of the yen, which
reduces the relative cost of exports from Japan, also contributed to the
"There are two huge factors -- health care and the exchange rate," said
David Cole, chairman of the Ann Arbor-based Center for Automotive
Research, which organized the Management Briefing Seminars in Traverse
City. "Unless you deal with those, it's not going to change."
GM improved the most
Of the traditional Big Three, GM showed the biggest improvement last
year, cutting its loss per vehicle to $146 from $1,271 in 2005,
excluding restructuring and other one-time expenses, according to
Harbour-Felax's presentation here Tuesday. But it lagged Toyota Motor
Corp. by $2,123 per vehicle.
GM has outpaced domestic rivals in creating common development and
manufacturing processes, and sharing parts and vehicle platforms across
"We continue to make strides in reducing the complexity in how we source
and manufacture products globally," GM spokesman Tom Wickham said.
Chrysler lagged Toyota by $3,088 in per-vehicle profitability, while the
gap for Ford was $3,939. Toyota was the most profitable automaker in the
study, increasing its profit per vehicle to $1,977 in 2006 from $1,715.
UAW has criticized Japan
Part of that gain is due to the yen's weakness. While more than half the
vehicles Toyota, Honda Motor Co. and Nissan Motor Co. sell in the U.S.
are assembled in North America, many components, such as engines, are
The UAW had no comment on Tuesday's report, but it previously has
criticized Japan's currency policy as being tantamount to trade subsidies.
Last week, when Toyota reported a record $4.1 billion net profit for the
April-June quarter, it said favorable currency rates accounted for more
than half of the 32 percent operating profit gain.
"There are issues with the valuation of the yen," said George Magliano,
an auto analyst at forecasting firm Global Insight.
But he said Japan's automakers weren't factoring in a weak yen in their
plans. "Their sourcing patterns have changed," Magliano said, noting
that they buy more components locally.